27 Feb 2025 Target Pricing – The Pros and (Much Larger Cons) of Answering the Question of Target Pricing
Written By Jeffrey Cartwright – 7 min read
Transitioning the manufacturing of a product from one country to another is a complex process requiring strategic decision-making and meticulous planning. When re-sourcing production—whether from China to Mexico or anywhere else—factories often ask three critical questions to assess feasibility and profitability.
- What is the annual estimated volume? Factories rely on this information to evaluate both capacity requirements and profit potential.
- What technical information is available? Factories need detailed drawings, specifications, and testing requirements. Companies accustomed to sourcing from China often lack complete 3D and 2D drawings, material details, or electronic schematics. Chinese factories typically treat these as proprietary information and may withhold them if they suspect production is being relocated. (See this recent blog) In Mexico, reverse engineering can bridge these gaps, enabling customers to own complete data at a cost, ultimately allowing flexible sourcing options.
- What is the target price? This is often the most debated and risky question. This article explores the pros and, more importantly, the significant cons of sharing a target price from both the factory (seller) and the customer (buyer) perspectives.
It is important to keep in mind that in contract manufacturing, raw material pricing affects the price of the product but does not generally change the amount of profit for the contract manufacturer, as that profit is typically based on conversion cost. With raw materials and purchased components comprising the majority of the product’s cost, it is critical to drive these costs to the lowest possible level while still maintaining quality and performance expectations.
However, sharing a target price is risky for both parties. It can create false expectations, where the factory might fail to secure the business altogether, or even if it succeeds, both the factory and customer may end up overpaying. Once a target price is met, efforts to lower costs often stop, and the customer may feel pressured to commit to the purchase, regardless of further opportunities for cost reduction.
From my 30+ years of sourcing experience, I’ve seen firsthand the pitfalls of answering the target price question. If one of my buyers ever shared a target price, they were warned about the risk of overpaying. A repeat offense would have resulted in termination for failing to prioritize the company’s profitability.
Customer Perspectives on Target Price
Buyers have a fundamental responsibility to reduce costs and increase profitability for their company. The question of a target price often puts them in a delicate position.
When asked for a target price, buyers may choose to share the current price or, more commonly, provide a lower number to explore potential savings from changing suppliers. However, if the buyer’s primary goal is to address significant quality or delivery problems, they might be more inclined to share the actual price, as their focus shifts from cost reduction to solving operational issues.
Even when a factory matches or slightly undercuts the target price, buyers who receive multiple quotes will likely encounter a range of bids. For instance, if five factories submit prices below the target, the buyer will ultimately need to reject at least four of them. This creates an emotional challenge, as the factories that are turned down may feel a sense of disappointment or frustration, potentially impacting future opportunities to collaborate.
Factory Perspectives on Target Price
Factories benefit from having a clear goal to guide their efforts, and a target price provides that direction. However, simply meeting the target price doesn’t guarantee a factory will win the business.
If the target price is set too high, factories may not approach the quoting process seriously, treating it as a formality. On the other hand, if the target price is easily attainable, efforts to further reduce costs often stop. Since raw material costs make up the majority of a product’s price, this can lead to unnecessary expenses—either for the customer or the factory. Ultimately, this results in higher prices and reduced profits for one party.
In either scenario, the chances of the factory successfully securing the business diminish significantly.
Recent Case: The Dangers of Providing Target Price
Over the past year, Shoreview worked on a hand-held appliance project with a factory in Mexico experienced in small appliance manufacturing. This factory had previously succeeded twice in producing competitive products for a Walmart supplier, demonstrating its ability to handle cost-sensitive projects.
When presented with the drawings for the new project, the factory owner quickly claimed that Mexican factories could not compete with China on pricing. If we had disclosed the actual landed cost from China, the owner might have abandoned the project entirely. Instead, we shared a higher, more achievable price. This decision kept the factory engaged, illustrating Danger #1: If a target price is too low, it can discourage factories from even attempting. Fortunately, this factory chose to persist rather than give up.
Initially, the factory’s bill of materials (BOM) estimate came in at $95—roughly 4.5 times the cost from China. This caused the factory to question the customer’s intentions, suspecting a lack of transparency or even manipulation. Here lies Danger #2: Sharing a target price can erode trust.
Shoreview stepped in to help analyze the 95 components of the BOM, revealing that the sourcing manager relied on catalog and distributor pricing, which are significantly higher than direct factory pricing. By broadening the supplier base and competitively bidding components, Shoreview helped reduce the BOM cost to $30—a 70% decrease. Without this effort, both the factory owner and sourcing manager would have remained convinced they couldn’t be competitive, reflecting an issue of low expectations rather than exploring actual solutions.
As the process advanced, we shared a target price. Once the factory achieved a price slightly below this target, they stopped further cost reduction efforts and demanded an immediate purchase order. However, the customer aimed for a lower price, and accepting that offer would have incurred an unnecessary cost penalty of over $1 million on a delivered-cost basis. This highlights Danger #3: Meeting a target price creates an expectation of immediate business, leading to emotional setbacks when this doesn’t happen.
The factory failed to recognize that it was competing globally and that simply hitting the target price wasn’t enough. To win the business, a factory must offer the lowest possible cost while maintaining profitability. Accepting an arbitrary “target” limits progress and creates frustration.
A factory manufacturing and selling the product themselves would have continued reducing costs to maximize profits. They wouldn’t be constrained by an artificial target but would strive to achieve the lowest cost structure possible for sustained success.
The World Is Not Frozen in Time
The global trade landscape is constantly shifting due to geopolitical risks, trade wars, government policies, and demographic changes. Tariffs are a vivid example of how quickly conditions can shift.
When a target price is shared and based on current realities, unforeseen external factors can disrupt its accuracy. During the Trump administration, tariffs were placed on most products imported from China into the U.S., creating both a crisis for buyers and an opportunity for factories. At the time, it was unclear how Chinese factories would respond to the potential loss of business. In hindsight, we see that U.S. importers absorbed the tariffs, while Chinese factories reduced prices by an average of over 75% of the tariff cost. This adjustment brought the final price, including tariffs, to approximately 105% of the original cost—a much smaller increase than feared.
For a mere 5% difference, it is often not worth the expense of switching suppliers and restarting production. This reality underscores the importance of considering long-term dynamics rather than relying solely on a static target price, which may quickly become irrelevant.
Shoreview Management Advisors Value Proposition
Re-sourcing manufacturing to the U.S. (re-shoring) or Mexico (near-shoring) presents both significant opportunities and unique challenges. Success requires the right expertise and resources.
Shoreview Management Advisors offers value to both Mexican factories seeking to expand into the U.S. market and U.S. companies looking for reliable, cost-effective manufacturing partners in Mexico. For over five years, we’ve helped clients successfully transition production from China to Mexico, even before the Trump tariffs and the U.S.-China trade war made this move more urgent.
With more than 30 years of experience in Mexican manufacturing and sourcing, Shoreview brings deep knowledge, hands-on expertise, and trusted guidance to every project.
Ready to streamline your sourcing strategy and unlock the benefits of near-shoring? Contact Shoreview Management Advisors today to explore how we can support your transition and help you achieve lasting success.